Econ 2005 Final Study Guide: Microeconomics Principles - Prof. Prasun Bhattacharjee, Study notes of Microeconomics

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Econ 2005 Final Study Guide  Chapter 1  Scarcity  Anything with a cost above zero is scarce  Economic choice  Economic decisions of individuals  Opportunity cost  The value of the option not taken  Marginal costs and benefits  The value of adding or taking away one unit  Sunk costs  Costs that cannot be gotten back  Rational self interest  Tying to maximize the expected benefit while minimizing the expected cost  Resources goods and services  Resources are items used in production of goods and services  Goods are tangible items produced and sold  Services are still bought and sold but are intangible  Economic decision makers  The interactions of households, firms, governments and the rest of the world  Circular flow model  Resources go from the household to the firms who turn them into products that go back to the household  Resource and product markets  The supply and demand of resources and products  Economic theory  A statement about economics that cannot be backed up by facts. An opinion  Scientific method  The procedure used to test economic theories  Positive and normative statements  Positive statements can be supported by facts and normative statements cannot  Fallacies of economic analysis  Fallacy that association is causation  Fallacy of composition ( what is true of the individual must be true for the whole)  Fallacy of ignoring secondary effects  Chapter 2  Absolute and comparative advantage  Absolute advantage is doing something at a lower cost  Comparative advantage is doing something at a relatively lower cost  Law of comparative advantage  If there are 2 tasks and 2 people one will always have comparative advantage in one of them  Specialization and division of labor  When labor is divided and people are able to focus on a single task it speeds up the process  Graphing  Self explanatory  PPF and shifting PPF  Production of consumer good vs. capital goods  Law of increasing opportunity cost  Since you always choose the option with the lowest opportunity cost each time you go up the opportunity cost gets higher  Three questions…What, how and, for whom  Deals with the goods produced  Three types of economies  Pure capitalism, pure command, and mixed  Chapter 4  Law of demand – substitution and income effect  The higher the price the lower the quantity demanded  Difference between quantity demanded and demand  The quantity demanded is for a specific price and the demand is the overall curve  Five factors that shift the demand curve  Income of consumers, prices of other goods, consumer expectations, the number or composition of consumers in the market and, consumer’s tastes7  Law of supply  The higher the price the more will be supplied  5 factors that shift supply curve  The state of technology, the prices of relevant resources , the prices of alternative goods, producer expectations, and the number of producers in the market  Market creation and equilibrium  When supply equals demand  Surplus and shortage  Surplus is when demand is greater than supply and shortage is the opposite  Price ceiling and floor  Prices cannot go above or below a certain amount  Shift of demand in the market  Equilibrium point moves in the up if it shifts right and down if it shifts left  Shift of supply in the market  Equilibrium point moves up for a rightward shift and down for a leftward shift  Shift of both demand and supply  Creates a new equilibrium point  Chapter 5  Elasticities  The reaction of consumers to a change in price or supply  Price elasticity of demand  Firm’s short run supply curve  A combination of all of the average variable cost curves  Zero economic profit in the long run  Only earn a normal profit in the long run  Long run equilibrium  Long run equilibrium price equals average total cost  Shift of demand impact on long run equilibrium  Supply reacts to a change in demand so that equilibrium price may be resumed  Constant and increasing cost industries  Constant cost’s long run average cost curve doesn’t shift up or down as industry output changes  Increasing cost industries average cost curve goes up when more is produced  Industry supply curve  Shows the relationship between price and quantity supplied once firms adjust to and short term economic profit or loss resulting from a change in demand  Productive and allocative efficiency  Productive efficiency occurs when the firm produces at the minimum point on its long run average cost curve so the market price equals the minimum average cost  Allocative efficiency occurs when firms produce the output that consumers value most  Chapter 9  Monopolies  One company controlling 100% of the market  Natural monopolies  Where it’s cheaper for one company to have a monopoly than for competition to occur  Monopoly demand curve  Equals the market demand curve  Barriers to entry  High cost to enter the industry  Monopoly inefficiency  A monopoly is not willing to become more efficient because it has all of the market so there is no reason to waste money  Consumer surplus  When a consumer is willing to pay more than the asking price  Social welfare  The overall wellbeing of all of the people in the company  Allocation of resources  Controls the entire market so there is no reason to be efficient with resources  Deadweight loss  A loss to consumers with a gain to nobody  Price discrimination  Charging different prices for different people  Chapter 10  Monopolist competition  One company controls the entire market  Product differentiation  Pointing out differences from your product and others  Short run monopoly  Where one company temporarily controls the market  Long run perfect competition  Zero economic profit in the long run  Excess capacity  Capable of producing more but choose not to in order to keep supply low and price high  Oligopoly  Very few firms controlling most of the market share  Chapter 11  Resource markets  The market where labor is demanded and wage is the price  Temporary wage differences  Where workers get different wages in different settings for the same type of work  Economic rent and opportunity cost  The amount paid to keep your customers from going to another brand (they would pay more but if you charge more they might go somewhere else)  Marginal revenue product  The firm’s total revenue resulting from employing and additional unit of the resource with other thing’s constant  Marginal resource cost  The cost of using one more unit of a resource  Profit maximization  Firms keep using more of a resource until the marginal benefit equals the marginal cost  Chapter 12  Labor markets and labor unions  Group of workers that collectively work for better conditions or higher wages  Substitution and income effect of a wage increase  If the wage raises then the price of the good goes up as well  If it is a union wage increase then the non union wage falls  Collective bargaining  Group of workers that collectively work for better conditions or higher wages  Industry and craft unions  Labor union confined to workers of a particular craft or industry  Chapter 13  Lonable funds  Money that is borrowed to increase production now at a cost instead of waiting  Marginal rate of return  Capital’s marginal revenue product as a percentage of its marginal resource cost  Optimal investment  Deciding how much to invest based on return and time it takes to get to maximum profit  Market interest rate  The equilibrium price of money  Present value and discounting  Present value is the amount you would have to pay now to receive some sum after interest  Discounting is dividing the future payment by I plus the prevailing interest rate to express it in today’s dollars  Corporate finance  Selling shares of the company to stockholders to gain additional capital  Consumers have control of the company with this approach  Chapter 14  Transaction costs  The cost of moving a good through middle men  Vertical integration  Taking over other people in the production chain  Bounded rationality  The amount of information a manager can comprehend about the firm’s operation  Make vs. Buy  If the opportunity cost of making it is lower than buying it then people will make  Outsourcing  Shipping jobs overseas to lower costs  Economies of scope  Exists when it is cheaper to produce two or more different items in one firm rather than produce them in separate firms  Imperfect information  Not having all of the information  It requires time to search for information  Search for information  Costs time and sometimes money to gain information  Winner’s curse  Ebay buyer paying more than the item is worth simply to win  Asymmetric information  When one side knows more than the other  Sellers knowing that a product is hazardous but the customer doesn’t know this  Chapter 15  Collusion and cartels  Groups agreeing to keep the price set to control the market  Price leadership  One person sets a price and the other companies follow suit  Game theory  Both prisoners will confess